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As banks cautiously look beyond the COVID-19 pandemic, they see a world in which growth will heavily depend on their contribution to a more fair and sustainable economy.

For the past year, sustainability took a back seat to the immediate health and economic crisis. But once the COVID-19 pandemic starts to fade, we expect that policy makers, regulators and funding providers will become more vocal about the need for greater adoption of ESG (environmental, social and governance), as stated in our previous blog. We need not to look further than the ECB’s recently published guidance on climate change risk and EBA’s discussion paper on integration of ESG into risk management, which contains regulatory expectations to banks when it comes to ESG and in particular there is the focus on the E.

Greener finance

Industry experts recognize that the transition towards a low-carbon economy will create additional complexities for financial services firms. As banks look to become more resilient in the face of the current crisis, ESG provides them with an opportunity to do so.

Of course, many banks were already working towards greener finance. Retail banks are creating new sustainable products and services, such as green home improvement loans, carbon neutral banking and sustainable ETFs. Wealth managers are promoting ESG-informed investing, and in the capital markets, green bonds are rapidly gaining popularity.

Banks have come to recognize that sustainability is an issue – in particular climate change – that requires industry-wide collaboration and response. However, in order to achieve the greatest possible impact and create genuine and lasting change, ESG should be truly embedded into the organization. This requires more than having a sustainable mission statement – as important as it is.

From risk to strategy

Next steps are being taken to embed ESG in the bank-wide organization. Besides quantifying the financial risks and possible returns arising from ESG, banks should understand their current baseline. ESG expectations of key stakeholders are an important aspect of this. Also, having ESG factors on the risk radar is inadequate if they are not also part of an organization’s DNA. Too often, ESG remains a reputational risk, while banks should be ensuring that ESG risks are the lens through which decisions are made. Banks need to develop an actionable and measurable ESG strategy that is integrated into their overall business strategy.  

The COVID-19 pandemic provides financial services firms with an opportunity to spearhead initiatives that will make them more sustainable and more resilient. Banks that fail to live up to this moment will not only face more regulatory and public scrutiny, but also constrained growth.

Download our whitepaper: Capital & Business Model Resilience

For more insight on capital & business model resilience, download our whitepaper by clicking the link below.  In this document, we focus on the longer-term implications for capital planning and how business model resilience has an important role to play for Dutch banks. Our goal is to define action points our clients should consider to support the way forward once the worst shock has passed.